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Marketplace Scratch Pad

By the bank sword

Scott Jagow Mar 9, 2009

Is it that easy to say “let them fail?” Republican Senators Richard Shelby and John McCain said it yesterday on national TV. But saying it and doing it are two very different things.

Shelby didn’t point out specific banks but said, “We bury the small banks. We’ve got to bury some big ones and send a strong message to the market.” When asked about Citigroup, he said “Citi’s always been a problem child.”

Problem child? Let’s face it, Citigroup is Damien. What’s the last scene in The Omen? Damien is holding the President’s hand, giving a sinister smile. I think that about sums it up.

But as tempting as it is, I just can’t say it. I can’t say “let Citigroup fail.” I’ll admit it — I’m afraid of the consequences.

University of Maryland economist Peter Morici made a compelling argument on the Marketplace Morning Report. He said letting Citi fail would be absurd — 8% percent of the population would suddenly be without a bank. The FDIC would go bust. Not to mention the ripple effect for banks around the world. You can listen to what Morici said here:

Still, Morici doesn’t like the current policy of dripping money into the banks. He wants to create a “bad bank” and sweep the toxic assets off their books. He says unless we do that, we’ll just have to continue the bank life support system indefinitely.

Doug McIntyre at 24/7 Wall Street points out the same thing about AIG. He says AIG is an “illustration of the sword that every major financial firm in the US holds” and:

“Given the trillions of dollars that would be required to make the largest banks around the world whole with one set of investments by central banks, the need for financial life support as a prophylactic could last for years.”

That’s no way to live.

So, beyond the “bad bank,” we’ll also have to break up these companies. They became too big for anyone’s good, and they should never be allowed to hold their swords against our necks ever again.

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